FMC publishes proposed rate index rule

Thursday, October 13, 2011

The U.S. Federal Maritime Commission has published a proposed rulemaking to amend its rules to provide common carriers and their customers with certainty and flexibility if they decide to use long-term contracts that adjust based on a freight rate index that reflects changes in market conditions.
The FMC has found that an increasing number of service contracts filed with the commission reference freight rate indexes. These indexes include, for example, the China Containerized Freight Index (CCFI), the Shanghai Containerized Freight Index (SCFI), the Drewry Freight Insight Index, and the Transpacific Stabilization Agreement (TSA) Index. Ocean freight rates in these negotiated service contracts adjust in increments based upon the changes in the referenced index levels or their annual or quarterly averages.
“It appears that some carriers and shippers in the ocean transportation industry are seeking stability through long-term contracts, while trying to preserve flexibility to adjust contract rates reflecting changes in market conditions,” the FMC said.
“Questions have arisen, however, whether references to these indices in service contracts are consistent with the commission’s current regulations,” the FMC said. “The commission’s regulations with respect to terms of service contracts and non-vessel-operating common carrier (NVOCC) service arrangements (NSAs) state that the terms, if they are not explicitly contained in the contracts, must be ‘contained in a publication widely available to the public and well known within the industry.’”
In its proposed rulemaking, the FMC said it has received inquiries from the industry as to whether certain freight rate indexes meet the commission’s standard, particularly its “widely available to the public” requirement. For example, until August 2011, the TSA index was not available to the public, even though some service contracts referenced TSA index before its publication, the commission noted.
In addition, CCFI, SCFI, and Drewry indexes make their current index levels available to the public without charge, but access to their historical data requires payment of subscription fees that can “reach several thousand dollars per year,” the FMC said.
In May, the FMC launched a container freight index and derivatives working group to investigate and advise the commission on issues arising from the use of container freight rate indexes such as those published by the Shanghai Shipping Exchange in service contracts and index-based derivative transactions. Last week, the FMC voted in favor of a proposed rulemaking.
As reported on Oct. 6 by American Shipper, the proposed rule would make clear that contracts can reference freight indexes or other outside terms, so long as they are "readily available to the parties and the commission." Some companies publishing freight rate indexes charge for that information or do not make it widely available and the old regulation was seen as possibly inhibiting the growth of index-linked contracts.
“As the commission began to consider whether these service contracts referencing freight indices comport with its regulation, it decided to do a more fundamental assessment of whether the regulation in its current form is more restrictive than is necessary to protect the shipping public and carry out the purposes of the Shipping Act,” the FMC said.
Comments related to the proposed rulemaking are due to the FMC by Nov. 28. For more details, access the Federal Register notice at http://www.gpo.gov/fdsys/pkg/FR-2011-10-13/html/2011-26418.htm